Why Retailers Sell Private Labels?

BACKGROUND TO RETAIL BRANDS

It is normally seen that marketing managers struggle between cost-saving standardization for a mass
market and high-cost customization for a specific niche in order to improve consumer-acceptance.
Given the technological developments in recent times, standardized products no more enjoy unique
selling propositions as imitations cannot be prevented from entry. Organizations continuously strive to
find a method of creating unique selling proposition (USP) to retain their existing customers and
acquire new customers. Such an outlook, in recent times, has called for a better understanding of
distribution channels in meeting specific customer-needs. The current thinking emphasizes mass
customization, a seeming synthesis of the two extremes of mass production and customisation. This
has been enabled by innovation in the area of distribution management that provides scope for
modification of production process to suit customers’ specific needs. This phenomenon is becoming
increasingly relevant in the changing scenario of distribution, where the urban markets witness
frequent birth of private labels introduced by large retail stores, posing challenge to the brand-strength
of national players. Private label products encompass all merchandise sold under a retailer’s brand.
That brand be the retailer’s own name or a name created exclusively by that retailer. In some cases, a
retailer may belong to a wholesale group that owns the brands that are available only to the members
of the group (PLMA). A popular private label changes the status of the retailer from a customer to a
competitor for a national brand marketer.

2. THE ROLE OF PRIVATE LABELS IN BUILDING RETAILER’S BRAND

EQUITY
Although researchers have discussed optimal private label introduction, quality, pricing, and
positioning strategies from the perspective of private label sales or category profit maximization, there
is little work, either normative or descriptive, that links these strategic decisions to building the
retailer’s brand equity. The following paragraphs discuss some issues that are particularly important
from the perspective of retail branding.

 Category determinants of private label success - What are the category and market factors that
determine how effective private labels will be in building the retail brand? Should retailers in
different formats emphasize private labels in different categories? Inman, Shankar, and Ferraro
(2004) show that consumers associate different product categories with different retail formats.
Bell, Ho, and Tang (1998) also argue that consumers build both category-independent and
category-specific store loyalty. Would it be more effective for retailers to develop private labels
in categories that consumers already associate them with or in categories that are not
traditionally associated with them?

 Private label tiers and retailer brand positioning - There are at least four tiers of private label
products, ranging from low quality, no-name generics to cheap, medium quality own labels to

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 somewhat less expensive, comparable quality private labels, to premium quality, high value
added private labels that are not priced lower than national brands (Laaksonen and Reynolds
1994).
However, more retailers are attempting to create a line of private labels that spans these
tiers. For instance, the supermarket retailer Kroger offers a line of three private labels – the
premium quality “Private Selection”, the Kroger Brand that is guaranteed to be better than or
equal to national brands, and the most economical FMV brand (For Maximum Value). Clearly,
this private label portfolio strategy allows the retailer to cover a range of price-quality tiers but,
how effective is it in building the retail brand? Is the retailer’s ability to position his or her
retail brand improved or restricted by the presence of a private label, and the tier(s) in which
the private label is positioned? What types of retailers are most likely to benefit from private
labels in terms of their retail brand equity?

 Private label branding strategy - Many retailers give their own name to their private label,
whereas others use different names for their private label products. For instance, CVS puts the
“CVS” name on all its private label products while Kmart does not. Aldi, a German hard
discounter who is becoming a major force in European retailing, also does not put its own name
on any of the products it sells even though only private labels are sold in its stores.

Little research has examined the effectiveness of retailer’s private label branding
strategy. The one exception we are aware of is Dhar and Hoch (1998) who included the private
label branding decision as one of the variables in their analysis of private label market share
and found that putting the retailer’s own name on the private label is positively associated with
private label share. What are the factors that determine whether one strategy would be more or
less effective than the other? On one hand, having the same name and perhaps even the same
package design for products in a wide array of categories across the store, certainly strengthens
awareness and recall of the retail brand, and may facilitate the consumer’s decision making. On
the other hand, will consumers find it credible that the retailer can provide a good value, strong
product in so many different product categories? Would it be desirable for a retailer like Aldi to
have its big box, discount image be transferred to the products it sells?

Consumer perceptions of a private label product branded under the store name are more
likely to color their impressions of the store as whole – and vice versa – than if a different name
were used to brand the product. Yet, the different inherent qualities of a retail store and its
products suggest that the flow of meaning and equity may not always be strong. In other words,
consumers may be able to mentally compartmentalize product offerings as distinct from
retailing activities such that, even if they deemed a particular store brand product as
unacceptable, they may be less inclined to downgrade their evaluations of the retailer as a
whole. If the retailer chooses not to use the store name for private label products, the feedback
effects, both positive and negative, would presumably be less strong.

 Extending private labels - One of the major benefits of brand equity is the option it provides
for extending the brand name to other market segments within the category or to other product
categories. Although some retailers with premium private labels sell those private labels
through other retail outlets (e.g., Starbucks), it is not yet a common phenomenon. In terms of

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 building brand equity, the key point of difference to consumers for private labels has generally
been "good value," a desirable and transferable association across many product categories. As
a result, private labels can be extremely "broad," and their name can be applied across many
different products. Research has shown that because of their intangible nature, more abstract
associations may be seen as more relevant across a wide set of categories. But all brands have
boundaries. If a retailer extends its private label assortment too far beyond the categories that
consumers associate with its channel type, will the benefits be so small as to outweigh the costs
of that assortment breadth? Or will such an action be particularly effective in differentiating the
retailer’s image from competitors in its own channel? Is a strategy of multiple private label
brand names more effective from the point of view of extension than having a single private
label under the store name?

 Manufacturer response - Manufacturers have responded to the rise of retail brands in a

number of different ways: decreasing costs, cutting prices, increasing R & D expenditures,
increasing promotions, introducing discount "fighter" brands, and supplying private label
makers. Hoch (1996) and Dunne and Narasimhan (1999) discuss how manufacturers should
think about private labels and what issues they should consider while supplying their products
to the retail brands. Ailawadi, Gedenk, and Neslin (2001) show that although there is a segment
of value conscious consumers who buy private labels and manufacturer brands when the latter
are promoted, there are also two separate and sizeable segments that buy one but not the other.
Offering deeper promotions to combat private labels may therefore not be the ideal response for
manufacturers. However, more empirical analysis is needed to examine the effectiveness of
different types of manufacturer response. Some manufacturers have their own outlets (e.g.,
Niketown, Polo) which compete with their retailers. What are the brand equity and consumer
loyalty implications of manufacturer-controlled stores?

3. FUTURE RESEARCH PROSPECTS

Based on the foregoing analysis, the following aspects can be researched taking the retail sector in
India separately:
 Currently, private labelling is a legacy in clothing (West Side) and in FMCG (Nilgiris, Food
World, Naaz). Products that require high level of consumer confidence – such as baby food and
health products – still do not the enter the private label bandwagon. What are the endogenous
and environmental factors that facilitate private labelling? How do different product categories
fare in such an analysis?
 What are the different strategies adopted by retail stores to promote their private brands? What
explains the commonalities and what explains the variations?
 How are the national (or even regional) brands disposed toward the phenomenon of private
labelling? Is there a difference in the promotional practices of the national brands between the
private labelled stores and others?
 Current literature, mainly based on the Western nations’ experiences, deal with national brand
versus retail brand as one-on-one issue. However, in reality, a national brand manufacturers /
marketers sell many product categories through retail stores. In the context of multiple brand
sales by a national brand manufacturer, what is the effect of the product-range sales on the
power position in the channel? This aspect can be effectively studied through case study
research method.

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  Does private label result in better store loyalty? Or, does perceived store loyalty cause retailers
to introduce store brands? Alternatively, what is the cause-effect direction between store-
loyalty and private labelling?
 Are there differences in the way in which channel conflict due to retail brands is perceived by
the stores and the national brand manufacturers? Intuitively, it ought to be so. Is there
significant difference? Why?
 Has there been an impact on the prices of national brands sold in the specific store after the
store has launched its own brands in a specific category?
 In what categories, retail brands are imitations of national brands? How are they positioned
against the original? (Premium, economy or fringe)
 How are retail brands positioned in consumers’ perceptual space vis-à-vis national brands?
 What research methods stores that own private brands use to collect consumers’ perception
about their brands? Is systematic research pursued? This can be studied through case method
research.

4. CONCLUSION
It is commonly said that branding and brand management principles can and should be applied to retail
brands. Even though there has not been much academic research on retail branding per se, a lot of
work has been done on retailer actions and consumer perceptions of retailer image that has direct
relevance to branding.

Consumer perceptions of various dimensions of retailer image - access, in-store atmosphere,

price and promotion, cross-category assortment, and within-category assortment - can help develop
strong and unique retail brand associations in the minds of consumers. They also influence the
utilitarian and hedonic benefits that consumers feel they gain from retailer patronage and ultimately the
price premium consumers will pay, the extra effort they will be willing to expend in order to shop the
retailer, and the share of trips, share of requirement, and loyalty that the retailer enjoys. By influencing
consumer preferences and shopping behavior in these ways, retailers’ image becomes an important
base for their retail brand equity. The relative importance of different image dimensions and of
utilitarian versus hedonic utility vary for different retail formats, different consumer segments, and
even for different purchase occasions for the same consumer, thus providing ample opportunity for
retail brands to differentiate themselves from one another. However, due to lack of explicit focus, a
number of important retail branding questions and issues are yet to be resolved.

Surinder Pal Singh is currently Professor at Rai Business School, New Delhi. Prior to joining
Rai Business School, he was associated with the corporate world for over a decade. He is a frequent
speaker on the topics of B2B Marketing, Retail Marketing, Brand Management, Entrepreneurship, &
Corporate Governance. He also contributes regularly to referred and non-referred journals in India. He
can be contacted at surinder.singh@rbs.edu.in